Credit Suisse Southeast Asia: We expect infrastructure, banks and consumer stocks to lead in 2011 (Update 1)

With the Southeast Asian economies returning to pre-crisis growth mode, the equity markets in the region also delivered strong gains of up to 46% in 2010, led by Indonesia and Thailand. Will the strong market performance be repeated in 2011? We still see absolute upside potential for the region in view of its robust earnings growth prospects and continued global capital flows into higher-yielding emerging market
assets, but it would be unrealistic to expect a strong outperformance similar to 2010, especially from Indonesia and Thailand, given the markets' extended valuations. Unlike most other Asian markets, which are still trading below their mid-cycle P/Es, Indonesia's re-rating has catapulted its P/E 2011E (at 14.5x) to a 17.9% premium over its 10-year average, while Thailand's P/E 2011E of 12.6x is at a smaller 10.5% premium.

With the US Federal Reserve implementing the second phase of quantitative easing (QE2), the huge liquidity flows will continue to be imported into Asia, particularly the emerging markets, reducing the cost of capital and supporting the credit cycle in these markets. This should sustain the improving trend in investment and domestic consumption in the Southeast Asian markets. At the same time, rising commodity prices, particularly rice, palm oil and rubber, are expected to lift rural incomes in Thailand, Malaysia and Indonesia, supporting domestic demand at a time of softening export momentum. The recent sharp run-up in the oil price, though a threat to inflation, bodes well for energy plays and the capital goods sector, such as oil rig builders. Meanwhile, the prospect of a national election in Singapore, Thailand and possibly Malaysia in 2011 suggests that government policies will stay pro-growth, with investment in infrastructure projects a key feature of government spending programs in Thailand and Malaysia.

We see banks, infrastructure/construction and selective consumer and commodity/energy stocks in the Southeast Asia region as well placed to ride on the trend of rising commodity/oil prices, increased investment in infrastructure and strong consumer demand